S.E.C. Charges Brothers With $550 Million Fraud

Friday

Jul 30, 2010 at 5:14 AM

The two Dallas billionaires, large donors to conservative causes, were charged with an extensive securities fraud.

EDWARD WYATT

WASHINGTON — Samuel and Charles Wyly, the billionaire brothers from Dallas who are large donors to philanthropies and to conservative causes, were charged Thursday with conducting an extensive securities fraud that the Securities and Exchange Commission said reaped $550 million in undisclosed gains.

The brothers, who founded Sterling Software, a business software and services company that they sold for $4 billion in stock to the software company CA in 2000, were also charged with insider trading violations from which they profited by more than $31 million, the S.E.C. said

The civil charges, coming just two weeks after the S.E.C. reached a $550 million settlement with Goldman Sachs, are part of a concerted effort by the commission to focus more sharply on prominent enforcement cases.

The agency came under fierce attack after the financial crisis of 2007-8 for failing to uncover fraudulent activity in the mortgage securities markets and for missing chances to halt the Ponzi scheme operated by Bernard L. Madoff.

The Wyly brothers are in many ways a study in contrasts, paradigms of self-made billionaires who for years have fought investigations into suspected tax dodges by the offshore trusts that the S.E.C. claims they controlled.

Samuel E. Wyly, 75, and Charles J. Wyly Jr., 76, who through a lawyer called the charges “without merit,” have given millions of dollars to Republican candidates and organizations, but Sam Wyly this year was also named one of the world’s 10 “greenest” billionaires by Forbes magazine.

The S.E.C. case, which was filed in Federal District Court in Manhattan, centers on charges of securities fraud and insider trading related to the shares of companies founded by the Wyly bothers or where they served as directors or executives. They include the retail craft chain Michaels Stores, Sterling Software, Sterling Commerce and Scottish Annuity and Life Holdings.

The ill-gotten gains, according to the S.E.C., were used to buy tens of millions of dollars of art, collectibles and jewelry; $100 million of real estate, including two ranches in Aspen, Colo., and a 100-acre horse farm near Dallas; and for charitable contributions, including $10 million to the business school at Samuel Wyly’s alma mater, the University of Michigan.

The charges are the result of a six-year investigation that began in 2004 when Bank of America reported to the S.E.C. that it had terminated numerous accounts held in the name of companies based in the Isle of Man because it could not determine who actually owned the companies.

The S.E.C. found that those companies, and similar entities registered in the Cayman Islands, were registered as trusts over which the Wylys said they had no formal control. But in fact, the S.E.C. charged, the brothers directed nearly all the investment activity in the trusts, selling hundreds of millions of dollars in shares without following S.E.C. disclosure rules governing stock ownership and trading by company insiders.

Through a lawyer, the Wylys said that they believed the charges were “a misapplication of the law” and that they had conducted all of their activities on the basis of accounting and legal advice that they received.

“They have never been given any reason to believe the financial transactions in question were anything other than legal and fully appropriate,” said William A. Brewer III, a partner at the Dallas law firm of Bickel & Brewer who is lead counsel for the Wylys. The brothers “expect to be fully vindicated,” he said.

Also charged in connection with the case were a lawyer for the Wylys, Michael C. French of Dallas, and a stockbroker, Louis J. Schaufele III, also of Dallas.

Lawyers representing Mr. French and Mr. Schaufele did not immediately respond to phone calls seeking comment.

The S.E.C. can bring only civil actions, but the brothers have previously been reported to be under criminal investigation for actions related to their investment activities. Lorin L. Reisner, the deputy director of the S.E.C.’s enforcement division, declined to comment on whether the commission had referred its current findings to the Justice Department or other law enforcement agencies.

The S.E.C. claimed that a scheme of undisclosed investments and securities sales took place over 13 years and involved three-quarters of a billion dollars in stock. As longtime executives and directors of public companies, the S.E.C. said that the Wylys knew or should have known their obligations as the owners of more than 5 percent of the stock of several companies.

S.E.C. regulations require that holders of more than 5 percent of a company’s stock disclose that fact, and that company directors and executives report any and all sales or purchases of shares. Though they claimed to own only small stakes in their companies, the S.E.C. charged that they owned from 16 percent to 36 percent of the four companies named in the complaint.

Many investors track stock sales by company insiders because they believe that can provide clues to a company’s prospects; if well-informed company insiders are selling, investors might conclude that a company’s financial position is weakening.

“By concealing that the entities making the sales were under the control of the Wylys, other investors paid inflated prices for the shares they sold,” Mr. Reisner said.

If the S.E.C. is successful in proving all of its allegations, it could result in one of the biggest judgments ever in a securities fraud case. The commission is seeking disgorgement of the $550 million in gains and prejudgment interest and financial penalties.

Unlike some billionaires who maintain a cloak of privacy around their private lives, the Wylys maintain their own Web site extolling their business history, philanthropic activities and other interests.

They have been, at times, similarly open about their political affiliations. In 2000, Sam Wyly was a principal contributor to Republicans for Clean Air, a group that bought ads extolling then-Gov. George W. Bush’s environmental record and criticizing the record of Senator John McCain.

Four years later, the Wyly brothers were substantial contributors to the Swift Boat campaign that raised questions about the war record of Senator John Kerry, the Massachusetts Democrat who was running for president against President Bush.

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